Analysts: Upbeat on oil and gas stocks

Published September 10, 2008
Businesstimes.com

DESPITE the correction in energy prices, some analysts remain bullish on local oil and gas stocks, citing factors such as strong fundamentals and overselling.

Deutsche Bank analyst Kevin Chong said in a report yesterday: 'In the past five days alone, about $4.4 billion of market value has been wiped out, but our checks with management indicate that fundamentally, nothing has changed. We believe the plunge has been overdone and that a great buying opportunity has emerged.'

The investment bank reiterated 'buy' calls on Keppel, Sembcorp Marine, Sembcorp Industries and ST Engineering with respective price targets of $13.50, $5.05, $5.50 and $4.


Similarly, DMG & Partners called an 'overweight' on yards Keppel, SembMarine and Cosco Corp, pointing to their strong Q2 results and firm fundamentals.

For example, Keppel Offshore & Marine posted Q2 net income of $155.8 million - up 18.5 per cent year on year - on $1.8 billion of offshore & marine (O&M) revenue, while SembMarine's net profit surged 50.7 per cent to $128.3 million, buoyed by revenue of $1.4 billion, said analyst Serene Lim.

'There are still possible contract inflows for Semb- corp Marine, such as Petrobras's new production platform P62 and Atwood Oceanics' option on its third semi-submersible drilling rig,' she said. 'While we remain concerned that new orders for jack-up rigs and semi-submersibles may be slowing as a result of influx of newbuilds, we believe the next demand cycle (floating production units) may be emerging. Singapore rig builders are well-poised to garner new contracts.'

DMG reckons the industry is now mainly concerned with execution risks and margin pressure, so it believes that SembMarine will fare better than Cosco due to its strong track record and timely deliveries. Its price target for SembMarine is $4.28.

CIMB-GK sees no signs of a slowdown at SembMarine, pointing to a US$425 million jack-up rig contract. This 'brings SembMarine's year-to-date new orders to about $5 billion, almost matching its record of $5.4 billion in 2007', it said. 'Net order book has grown to $10.2 billion from $6.9 billion at end-2007.'

SembMarine already has two jack-up orders from Egyptian Drilling Company, due for delivery in Q309 and mid-2010. CIMB-GK expects more orders from the Middle East, owing to a shortage of shallow-water jack-ups there.

Indeed, CIMB believes the order-book build-up and continued margin expansion are key catalysts for stock performance, and issued an 'outperform' on SembMarine with a price target of $5.25.